Blog
| October 1, 2018

Can China Be Trusted?

Theft of intellectual property (IP) by China is nothing new. In fact, it is estimated to cost U.S. companies about $600 billion (give or take) annually. Such a staggering number makes you wonder how much longer the United States (and other developed countries) can continue treating China as if it were a developing nation that simply didn’t understand the rules. China clearly understands the rules, and yet it seems consistently willing to bend, break, or circumvent these laws by whatever means necessary. Consider the most recent case involving GSK.

Think Your Trade Secrets Are Safe From China?

Research scientist, Tao Li, Ph.D., (a naturalized U.S. citizen) pleaded guilty to receiving trade secrets on anticancer research smuggled from GSK. The information was taken by Yu Xue, Ph.D., (also a naturalized U.S. citizen) who pleaded guilty a month prior to illegally taking the proprietary information while working at GSK’s Philadelphia facility. The goal of the theft was toward launching a rival business, Renopharma in Nanjing, China. According to the United States Attorney’s Office, Eastern District of PA, Renopharma, received financial support and subsidies from the government of China. U.S. Attorney William M. McSwain called the theft a “form of economic warfare against American interests.” The case sounds somewhat familiar.

This past August, a GE engineer, Xiaoqing Zheng (a naturalized U.S. citizen) with ties to Chinese companies, was arrested and accused of stealing files related to proprietary power-turbine technology. According to an article in the Wall Street Journal, Mr. Zheng took elaborate measures to avoid detection, embedding encrypted files into the code of a seemingly innocuous image of a sunset to send to a personal email address. According to the FBI, Zheng’s actions of moving files, renaming, encrypting, and then hiding within the binary code of seemingly harmless files, are uncommon — even among trained computer experts. But here’s where it gets even more interesting; while employed by GE, Mr. Zheng owned at least one company in China that just so happens to be working on technology similar to what he is doing at GE. Even more troubling, when FBI agents searched Mr. Zheng’s house, in addition to seizing his passport and electronic devices, they also secured a handbook that explains “the type of resources the government of China will give to individuals or entities who can provide certain technologies.”

And these are just a few examples of companies that were caught after the damage already had been done.

Made In China 2025 — Stolen From USA Today?

Made in China 2025 (MIC 2025) is a government-sponsored 10-year initiative that strives to secure the country’s position as a global powerhouse. The plan targets 10-priority sectors:

In other words, MIC 2025 is a strategy to use state resources to alter and create comparative advantage on a global scale. The plan not only affirms that the government plays a central role in economic planning, it illustrates China’s intent to leverage legal and regulatory systems to favor domestic companies over nondomestic in targeted sectors. According to a report (Made In China 2025: Global Ambitions Built On Local Protections) published by the U.S. Chamber of Commerce, China’s state-backed support for acquisition of specific technologies represents a new feature and natural extension of China’s industrial policy.

Of greatest concern should be the possibility that China, via MIC 2025, may be incentivizing widespread IP theft. But there are plenty of cases of IP theft (or attempted IP theft) of various American technologies prior to the initiative’s launch. One case involved Walter Liew (a naturalized U.S. citizen), a technology consultant working for Dupont, who was accused of stealing company process secrets from 1997 through 2011. He even took factory blueprints and used the information to win contracts worth nearly $30 million. FBI agents and federal prosecutors consider the Liew case a watershed moment toward understanding the extent of Beijing’s pursuit of U.S. intellectual property. And then there was Mo Hailong, who in 2013 along with six other Chinese nationals, was accused by U.S. authorities of digging up seeds from Iowa farms with plans to send them back to China. On October 5, 2016, Mo Hailong, a Chinese national who had become a lawful permanent resident of the United States, was sentenced to prison for conspiracy to steal trade secrets.

But what I found most telling regarding the situation between China and outsiders took place this past summer when I moderated a panel, How To Broker Strategic Alliances Between International Biopharma Stakeholders, at the 2018 BIO International Conference in Boston. One of the participants, Sander van Deventer, M.D., Ph.D., operating partner at Forbion and CSO at UniQure, has had significant business dealings with companies in the Asia-Pacific Region. During the panel conversation, the following question was posed: “What should startups be aware of and focused on when partnering with a large international organization located outside your home country?” After two panelists provided their thoughts, the question was refined to: What if this scenario involved a partnership between a company in China or Japan? Deventer then responded (all captured in an article published in Life Science Leader’s August 2018 issue).

“There are a lot of bio dollars coming out of China, and we [i.e., Forbion Capital Partners, an EU based VC firm] have done some very successful deals there. That being said, I would categorize China as the Wild East. We’ve been in situations in China where we’ve had signed contracts, everything seemingly in order, and millions of dollars at stake. You’d think with everything “signed and sealed” you’d be pretty much good to go, but the signature proved completely worthless. We’ve had entire deals disbanded, and there’s not a whole lot anyone can do. To prevent such situations in China, you need a strong, reliable partner that is backed by the Chinese government.”

“On another occasion we were establishing a fund in China. Everything was well talked through, yet suddenly we found a 10 percent “entertainment” item added to the budget. This is basically bribery. While this might be a “normal” practice in China (or other countries), if you do this as a foreign company you can be severely punished, as GSK (fined $500 million in 2014) knows all too well. But there are other details to be aware of, such as how you get your money out of the country. Right now there is only the Hong Kong route. If doing a deal with a Chinese onshore company, getting your money out is not usually something discussed up front. But it should be, because if the deal is done, and you hadn’t looked into that, you won’t likely be able to access those funds outside of China.”

While Deventer noted coming across some challenging and questionable situations in China, he also stressed that his company had done some rather successful deals as well. Because China is such a large country, could it be we see more cases of IP theft involving China because there are quite simply more people in China?

Is China Getting A Bad Rep Resulting From A Few Bad Actors?

Could the current negative backlash toward China be the result of just a few “bad actors,” similar to what Martin Shkreli did to the pharmaceutical industry’s image? In a 2018 Nature peer-reviewed article, Biotech Booms in China, , there is no mention of state-sponsored IP theft by China, though there is significant emphasis placed on the Thousand Talents Plan (1000plan.org/en/). Implemented in 2008, the program has been successful in recruiting talent to return to China. Referred to as returnees, these tend to be China-born scientists with overseas experience. Thus far, the program has recruited 7,000 returnees (across all disciplines). About 1,400 have come from the life science sector and are credited with having had a “huge impact” on the industry and being a driving force behind the majority of drug approvals in China.

China IP-Theft Controversy Likely To Continue

About a week ago, an article appeared in the South China Morning Post which asks if Beijing’s plan for high-tech dominance is as big a threat as the West seems to think. It shares an example of a little-known mainland Chinese start-up (Redcore) that proudly announced (back in August) it had “broken the American monopoly” with the development of an original web browser. But the Beijing-based company’s claim was short-lived, as its software was quickly found to have traces of Google Chrome. The article goes on to say that the incident underscores the West’s long-standing grievance around China technology transfer tactics and IP theft, as well as the gap that must be narrowed if China hopes to become a technology superpower.

According to this article, the original goal of MIC 2025 was simply to catch up with other countries, placing emphasis on how big the technology gap actually is between the U.S. and China. Miao Wei, China’s industry and information technology minister, concedes that the nation needs 30 years to become a manufacturing superpower. “Made in China is not as powerful as perceived,” he said in 2015 remarks to delegates at the Chinese People’s Political Consultative Conference. But as China is a communist country, and the government has significant influence over what its media publishes, one has to wonder how much of this is accurate. Because what better way to get countries to not view China as a serious threat, than to paint a picture positioning it as being woefully behind.